1、North America Equity Research16 December 2019 Semiconductors2020 Outlook:Positive Y/Y Inflection Ahead-Cloud Datacenter/5G Strong Growth Drivers;Top Pick AVGOSemiconductors,Semiconductor Cap Equipment&Tech HardwareHarlan Sur AC(1-415)315-Bloomberg JPMA SUR Bill Peterson AC(1-415)315-Bloomberg JPMA P
2、ETERSONB Andrew Nguyen(1-415)315-Alexander Kim(1-415)315-J.P.Morgan Securities LLCSee page 23 for analyst certification and important disclosures.J.P.Morgan does and seeks to do business with companies covered in its research reports.As a result,investors should be aware that the firm may have a con
3、flict of interest that could affect the objectivity of this report.Investors should consider this report as only a singlefactor in making their investment Although semiconductor stocks have outperformed in 2019,we continue to see further upside in 2020 as the industry growth rates inflect positively
4、 and drive the positive earnings revision cycle.We estimate in 2019 semiconductor industry revenue growth is on pace to decline by 6-8%(ex.Memory)following 8%Y/Y growth(ex.Memory)in 2018.However,exiting 2019,aside from weaker automotive demand(IHS recently reduced 2H global production forecasts and
5、have a flattish outlook for CY20),we see strength in mobile,gaming,datacenter,and PCs with industrial demand trends likely to improve in 2020 overall driving a positive Y/Y cyclical inflection in industry growth in 1H20.We forecast overall semiconductor industry growth in 2020 in the 4-7%range and e
6、arnings growth of 8-12%.Longer-term,we continue to expect the semiconductor industry to exhibit relatively stable and less cyclical growth characterized by low-to mid-single-digit%annual revenue growth and high single-digit%unit growth.Assuming no further major negative developments in regards to U.
7、S./China trade,we believe the overall fundamental environment will likely be relatively constructive in 2020 with areas of strong growth including cloud datacenter infrastructure spending(compute,networking and storage),5G wireless,and gaming.From a stock perspective,the SOX index is significantly o
8、utperforming thus far in 2019,up 55%vs.the Nasdaq and S&P500 at+32%and+26%YTD,respectively,and especially since mid-May as investors continue to positively discount improving industry trends in 1H20(positive Y/Y inflection in industry revenues)after a down 2019.In terms of valuation,the SOX is tradi
9、ng at 18x consensus 2020 earnings estimates,in-line with the S&P,and we see average semiconductor stocks having 15-20%upside from current levels over the next 12-18 months(coming out of the 2015/2016 down cycle,we remind investors that the semiconductor stocks delivered two consecutive years of 35%+
10、returns).Furthermore,we expect M&A/consolidation and aggressive capital returns will likely drive valuation support in our stocks through the year.Our overall top pick in semis is Broadcom(AVGO)on underappreciated diversification(with datacenter networking/storage accounting for 25%of revenues),stro
11、ng FCF generation and dividend growth.We also focus on OW-rated NVDA,INTC and MU with strong datacenter exposure,OW-rated QRVO and MRVL as key 5G plays,OW-rated TXN and MCHP on improving industrial/cyclical trends.In small caps,our top pick is OW-rated IPHI and in semiconductor equipment,our top pic
12、k is OW-rated KLAC.Long-term view of stable semi growth intact we continue to focus on market leaders with margin/free cash flow expansion potential(large caps)and strong product cycles(small caps).JPMs global economic team estimates global GDP growth of 2.5%in 2020(1.4%in developed markets and 4.2%
13、in emerging markets).Given the diversity of semiconductor demand drivers and our view of the industry becoming a more stable and less cyclical(characterized by low to mid-single-digit%annual revenue growth and high-single-digit%unit growth on average),we believe the sector has become more of a stock
14、 pickers market.In large cap,we believe the market will reward companies with strong market leadership,scale and margin/FCF expansion potential.In SMid cap,we favor companies with market leadership positions and strong product cycles.We broadly favor companies with outsized hyperscale/cloud datacent
15、er,5G,AI/ML,autonomous vehicle/ADAS and industrial/auto exposure.2North America Equity Research16 December 2019Harlan Sur(1-415)315- Supply/demand environment appears relatively stable and we expect semiconductor revenues to bounce back in the mid-single-digit%range next year;we continue to expect m
16、ore normalized industry revenue growth(3-5%ex-memory)over the next few years.We expect demand trends exiting 2019 and into 2020 to reflect seasonal trends(Q/Q)returning to a more normalized trajectory in 1H20,following weak Y/Y performance for most of 2019.Supply-side fundamentals(channel inventorie
17、s and lead times)remain disciplined and within company target ranges,and we believe the industry is shipping at/below consumption.Taking everything into consideration,we maintain our view of positive Y/Y growth trends returning in 2020,likely in the 4-7%range.Moreover,we maintain our long-term view
18、of industry growth in the range of 3-5%annual growth.We continue to be positively biased on the cloud datacenter end-market in 2020.The datacenter end market continues to exhibit strong growth driven by a technology upgrade cycle and increased capex spend on datacenter build-outs.Large hyperscalers
19、such as Google,Amazon,Facebook,Apple,Tencent and Alibaba are expanding their infrastructure and cloud offerings,leading to accelerated deployments of next-generation datacenter servers,switches/routers and interconnects(optical).We estimate capex from the top 7 cloud service providers(CSPs)to increa
20、se 18-20%in 2020,after low-single-digit growth in 2019 as the large cloud service providers went through a few quarters of digestion after a strong 2018 that saw+60%Y/Y growth in cloud spending,benefitting providers of compute,storage,networking and optical.We expect significant uptake of Intels Cas
21、cade Lake(14nm),Cooper Lake platform(14nm),and Ice Lake(10nm)in 2020,and AMDs Rome EPYC 2 platform to ramp in 2020.AI/Deep Learning investments should continue growing strongly in 2020.In datacenter networking,we believe the 50Gbps switch port upgrade(PAM 4 modulation)is continuing to ramp strongly
22、and represents a strong upgrade cycle in switch and optical ports that support 50Gb,200Gb and 400Gb/sec speeds.2020/2021 5G smartphone unit estimates boosted with potential upside;RF content increasing meaningfully.Our global research colleagues raised 5G smartphone unit expectations in 2020 and 202
23、1 from 200M/450M to 229M/462M in 2020 and 2021,respectively(+15%,+3%,respectively;see research note here).5G penetration as a percentage of total smartphone shipments is expected to increase from 17%in 2020 to nearly 50%in 2022,with the pace of 5G adoption exceeding that of the 4G/3G transition.Of n
24、ote,our global teams unit estimates are near the low-end of supply chain expectations.Thus,we see the potential for unit upside,should demand come in closer to supply chain expectations.Our colleagues point out that declining ASPs for 5G phones is driving much of the upside and anticipates 5G phones
25、 reaching the 2000 RMB level(50%Y/Y in 2019 with 18%CAGR expected between 2019 and 2022 with corresponding silicon revenue opportunity of 12%.45%22%7%26%28%60%1%19%0%10%20%30%40%50%60%70%-10 20 30 40 50 60 70 80 90 10020122013201420152016201720182019E2020ETop ISP aggregated CAPEXyoy(%)28.1730.2138.1
26、949.0478.5579.6694.660.0010.0020.0030.0040.0050.0060.0070.0080.0090.00100.00201420152016201720182019E2020EAlphabetFacebookAmazonMicrosoftIBMAlibabaTencent12North America Equity Research16 December 2019Harlan Sur(1-415)315- Figure 6:Datacenter Switch Port Growth and Switch Silicon Opportunity(2019-20
27、22E)#of Ports(M)BSource:IDC and J.P.Morgan estimates.Artificial intelligence(AI)and deep learning(DL)garner much investor attention as a sub-segment of datacenter,and we do anticipate AI being one of the fastest growing silicon opportunities in all of semiconductors.We see Artificial Intelligence(AI
28、)as the next growth driver for the semiconductor industry,accelerating growth in the Cloud as well as in Edge devices.We forecast AI semiconductor revenues(focusing on Computing demand)to record a 40%CAGR from 2019-22,reaching a$33bn market size.While initial demand is likely to be led by AI trainin
29、g workloads in the datacenter,we expect AI inference to take off in the next 2-3 years and become the biggest semiconductor market.AI and High Performance Computing(HPC)are the next catalysts of leading-edge semis demand,helping advanced process technology in logic semis,lifting high-end memory adop
30、tion and semiconductor capital equipment spending.Among AI training silicon solutions,we believe GPU(NVIDIA in particular)has taken the lead thanks to its parallel processing characteristics while other accelerators and ASICs are also being trialed.We expect more integrated solutions(CPU-GPU/multipl
31、e accelerators)to start gaining traction once the market becomes more mature.PAM4 networking in datacenters:Key technology behind upcoming 50GbE specifications that minimizes power and cost overhead.upgrade already underway and to ramp through 2020PAM4(pulse amplitude modulation)is a new modulation
32、scheme used in Ethernet switching that allows 2 bits to be encoded per symbol,which essentially doubles the data transmission rate over current 10G and 25G NRZ(non-return to zero)schemes without increasing signal frequency.Increasing signal frequency(from 10G to 25G)reduces the signal window roughly
33、 proportionally,making it more difficult to decode the signal properly.As a result,there are limitations to signal frequency scaling which prompted technologists to explore other methods of data transmission.PAM4 is another method of increasing data transmission rate by increasing the number of sign
34、al levels(from 2 to 4).Naturally,signal integrity degrades since 4 levels(2 bits)need to be decoded in each data cycle.However,compared to simply doubling the signal frequency using the NRZ scheme,PAM4 maintains the same data cycle period in exchange for less signal clarity.This approach helps minim
35、ize power consumption since signal frequency is kept constant(faster signal burns more power).It also helps reduce infrastructure costs,footprint,and cable complexity since extra aggregation circuitry is not needed.1.01.52.02.53.03.50.010.020.030.040.050.060.070.02018201920202021202225Gbps PortsSili
36、con Port OpportunitySilicon Switching/Routing Op CAGR(2019-2022E):18%Switching/Routing Port CAGR(2019-2022E):12%13North America Equity Research16 December 2019Harlan Sur(1-415)315- Broadcom is ramping its Tomahawk 3/Jericho 2 200G/400G Ethernet chipset platforms while the only optical vendor besides
37、 Broadcom that has a proven and qualified PAM4 PHY/driver/TIA/laser for 400G speeds is Inphi.The team is shipping high volume production of Polaris PAM-4 50G DSP(with integrated TIA and driver)to major cloud datacenter customers(Google)and Vega 50G PAM4 retimer/gearbox into Mellanox and Cisco.We est
38、imate that IPHI has 80%share of the PAM4 optical connectivity opportunity(module and linecard)and a strong roadmap of future products at 7nm(its 7nm 400G ZR next-gen DCI solution called Canopous is already sampling to key customers).Next year,both Microsoft and Facebook will be making the transition
39、 to 200G/400G as well as other cloud/hyperscale titans,and we see a 3-4x increase in optical port deployments in CY20.StorageWe are more optimistic on HDD shipments over the next few quarters despite CPU shortages(impacting notebook PC HDD demand)because we are confident cloud datacenter spending co
40、ntinuing to grow in 2020,which is positively impacting capacity-optimized HDD products.In HDD,WDC recently reiterated in its F1Q20 earnings call of their plans of introducing and sampling their next gen 16TB and 18TB capacity-optimized HDD platforms by end of this year with volume shipments in 1H20.
41、The team raised its expectations from 30%to 40%exabyte growth in capacity HDD for 2019(which implies 80%2H growth over 1H vs.60%previously)and its clear that the cloud/hyperscale datacenter customers are reaccelerating their spending in the 2H19 and will continue into 2020 as well.IDC forecasts capa
42、city-optimized enterprise HDD shipments to be up 31%Y/Y for 1H20.On the SSD side,we see further NVMe SSD penetration into enterprise/cloud applications,where the incentive is optimizing IOPS for AI/ML applications and increasingly dynamic workloads.IDC forecasts Enterprise SSD shipments to be up 14%
43、Y/Y in 2020.Overall,we believe storage shipments will continue to grow in 2020 and see solid growth drivers over the long term.WDC believes new HDD form factors enhancing areal density and growing shipments of capacity enterprise drives for datacenters will drive 35%Y/Y total HDD EB growth.For Flash
44、,WDC sees low 30%range for flash industry supply bit growth.5GOur global research colleagues raised 5G smartphone unit expectations in 2020 and 2021 from 200M/450M to 229M/462M in 2020 and 2021,respectively(+15%,+3%,respectively;see research note here).5G penetration as a percentage of total smartph
45、one shipments is expected to increase from 17%in 2020 to nearly 50%in 2022,with the pace of 5G adoption exceeding that of the 4G/3G transition.Of note,our global teams unit estimates are near the low-end of supply chain expectations.Thus,we see the potential for unit upside,should demand come in clo
46、ser to supply chain expectations.Our colleagues point out that declining ASPs for 5G phones is driving much of the upside and anticipates 5G phones reaching the 2000 RMB level(70%GM,51%OM next year.More importantly,the company announced an annual dividend raise to$13.00 during their latest earnings
47、call,a 23%dividend increase vs.their prior$10.60 and with the companys continued strong FCF generation,and we estimate adjusted FCF of$10.5B+next year,which implies the annual dividend rising closer to$13.00+per share.NVIDIA(NVDA OW)We believe NVIDIAs HPC/professional visualization/datacenter moment
48、um remains strong as new compute workload acceleration(AI/Deep Learning,Analytics,etc.)penetration remains solid($20B training/inference silicon SAM opportunity in 2 years).NVIDIA has delivered strong growth across Gaming and Datacenter/HPC over the past few years and we continue to see outsized gro
49、wth and clear leadership in the two segments/end-markets over the next few years.We see continued datacenter reacceleration for 2020 due improving cloud demand.NVIDIA will likely continue to benefit from renewed cloud spending that should lead to increased demand for its Volta V100 Training platform
50、s and continued traction within conversational AI and also from the ramp of its T4 Inference platforms.We believe Inference will continue to account for a solid double-digit percentage of Datacenterrevenue.In addition,NVIDIA is an emerging leader in autonomous driving,which we expect to be a long-te
